Exclusive: Citadel accuses Jump employees of stealing secrets

(Reuters) - Citadel, one of the world’s biggest hedge fund manager, has accused employees of a rival Chicago high-frequency trading firm of stealing its trading programs.

It said in a court petition that at least one its former employees stole trading algorithms and brought them to Jump Trading, a firm that employs 325 people in Chicago, London and Singapore.

Ken Griffin’s Citadel is using an unusual legal strategy to try to glean information from Jump -- it is petitioning an Illinois state court for documents before filing a lawsuit, a move that is legal in that state.

Jump Trading said in a motion to dismiss late last month that the hedge fund’s request is frivolous and an effort to win competitive information through the courts.

“Citadel’s petition has no merit whatsoever. Jump plans to defend against the motion aggressively,” said Tessa Wendling, general counsel at Jump, in a statement emailed to Reuters.

A spokeswoman for Citadel, which has about $12 billion in net assets, declined to comment.

Citadel’s efforts to learn information before even filing a lawsuit reflect just how zealously some hedge funds and Wall Street firms will fight to protect their trading codes, which have become a bigger source of revenue in recent years.

In 2009, Citadel filed a lawsuit accusing former senior trader Mikhail Malyshev and two other ex-employees of violating non-compete clauses in starting their own firm, Teza Technologies. Malyshev’s group at Citadel used trading algorithms to exploit small mispricings in the market.

According to Citadel’s petition, about 10 employees from that same area, Citadel’s tactical trading group, have moved to Jump Trading since 2005.

Over that time, some of the strategies used by Citadel’s tactical trading group have become less profitable. According to the fund manager’s petition, the strategies are behaving in a way consistent with their having been copied by rivals.

Citadel is looking for Jump to hand over personnel documents, strategy and trading records, and source code. Citadel also wants to take depositions from its former employees who are now at Jump.

The hedge fund manager is not accusing its former employees of violating non-compete agreements, but does believe employees may have violated non-disclosure agreements.

Citadel’s petition pits founder and Chief Executive Griffin, a notoriously tough fund manager, against Bill DiSomma and Paul Gurinas, two former floor traders in Chicago’s future pits who built Jump into one of the biggest U.S. proprietary trading firms.

In its response filing, Jump said that Citadel had no evidence that the algorithms had become less profitable because of any of Jump’s actions. It said that any of the hundreds of other algorithmic trading firms could be at fault.

“The petition is nothing more than a transparent attempt by Citadel to obtain a competitive advantage by gaining access to Jump’s proprietary and confidential trading strategies,” Jump’s motion said.

In the 2009 lawsuit, Citadel successfully won an injunction barring Malyshev and his two colleagues from working at Teza Technologies through November 2009.